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11/15/2009

Is the Netbook Cannibalizing Laptops and PCs?

The introduction of the lightweight, convenient and inexpensive netbook has some computer manufacturers worried. Although these manufactures expected and planned for the mini-laptop to be purchased as a complement to consumers’ laptops and PCs, the recent economic downturn has turned the product into a supplement.

Although the mini-laptop lacks the storage and software capabilities of the larger laptops and PCs, the dramatically lower price is convincing the consumer they can manage. The article quotes one consumer who, being concerned about the rough economy purchased the mini because it was less than half the price of a traditional laptop.

Normally the computer manufacturers would be thrilled to see a product’s sales to go from 182,000 to 11 million in one year, but not at the expense of more profitable products (i.e. Laptops and PCs). The mini has not only cannibalized laptop and PC sales, but has put pressure on the prices of these items. The article states that the estimated average selling price of portable computers will drop 8-12% in the next two years, partly because of the netbook.

The text outlines options for mitigating product cannibalization. The computer manufacturers could upgrade the high-profit products and/or degrade the mini-laptops to highlight the differences between them and help the consumer directly discriminate. This strategy might be a short-run solution to cannibalization, but comes with the obvious risk of damaging a product, that could be profitable in a different economy.

3 comments:

I think the answer to the question is the title is that yes, of course netbooks are cannibalizing other computer sales.

This is typical in the computer hardware industry. There's an important lesson here. Computer hardware is a largely unregulated industry. And yet, the industry is constantly putting out new products, driving prices of old products down, and not making much profit in the process. Anyone who thinks we'd be better off with more regulation, in say finance or healthcare, ought to have a good argument for why profit rates are higher and innovation is lower in those industries.

I don't think that there is much chance of mitigating product cannibalization in this market now that the mini has been introduced. Once companies decided to offer the mini at about half the price of a regular laptop. Price conscious consumers instantly gravitated toward the inferior good. Any attempt by a single manufacture to change prices in order to help consumers directly discriminate will simply motivate the price conscious consumers to purchase from another supplier.

Dr. Tufte

The reason that the hardware industry works so well as a largely unregulated industry is simply because there is only three major factors to consider when purchasing a computer: price performance, and portability.

While I am not a fan of regulation. I don't think that the success of a minimally regulated computer industry can be used as an argument for similar action in the health care and financial markets. Most 'average' consumers currently view decision making in health care and finance as so complex that they are unable to make an educated decision without the help of an 'expert'. The only way that Americans will be able to feel confidant in their decisions is through greater dissemination of knowledge. Since both industries are largely service oriented, such dissemination has the appearance of greatly undermine the value of the professionals that work in the two industries. Therefore, those professionals continue to complicate and conceal in order to keep the public dependent on their services (to some extent we all do the same thing in our lives). Anytime a group is able to gain any degree of power, there will be some in the group who decide misuse that power. The government is then compelled to get involved (ie. regulation). One of the major problems is the fact that the same scenario is playing out within our government creating the exact same problems that we have in the health care and finance industries.

The economics of intellectual property is fascinating and probably more relevant than ever before. Let me know if you have some good articles on the subject.

I thought that this was a fascinating article because it is a perfect example of an unexpected problem resulting from product expansion. Manufacturers of laptops and PCs were expecting to add market share, but ended up stealing customers from themselves because of the price appeal. Upper-end products lost revenue while the small netbooks shot through the roof. Analysts can never be sure about market studies.